How to Conduct a Financial Performance Review 

Calculator, notebook, and abacus sitting side by side. Represents conducting a financial analysis to understand your performance.
Author: Kody Wirth

Kody Wirth

Kody Wirth

5 min. read

Updated January 4, 2024

Are you currently reviewing your financial performance? If you’re not, you’ll struggle to identify opportunities and red flags that can help or hinder growth.

Luckily, reviewing your financials isn’t all that complicated—even if you’re not a numbers person. It just takes practice and a solid framework to work through.

What is a financial performance review?

Financial performance review (or plan vs actual review) is the process of evaluating your business’s financial performance and adjusting your forecasts and strategies based on the results. 

You do this by reviewing your current (actual) financial statements, including the balance sheet, income statement, and cash flow statement—and comparing those with your budgets and forecasts.

The goal is to identify potential issues or opportunities that, with the right adjustment, can lead to business growth. 

How to conduct a financial performance review

Here are the four steps to complete your financial performance review.

1. Collect and review your most recent financial statements

You need to collect your most up-to-date financial statements for this analysis. Here’s a quick cheat sheet covering the function of each statement:

Income (or profit and loss) statement

  • Tracks your income and expenses. 
  • Compare this statement to your sales and expense forecasts.
  • Functions as a snapshot of your gross margins and profitability.

Cash flow statement

  • Tracks cash moving in and out of your business over a certain period.
  • Compare this statement to your cash flow forecast.
  • Tells you if you have negative or positive cash flow, as well as your current cash position.

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Balance sheet

  • Summarizes your assets, liabilities, and equity.
  • Use current and quick ratios to understand your liquidity.
  • Provides a complete picture of where your business stands financially.

You must look at all three of your financial statements together to get the full picture of your business finances. 

Dig deeper:

2. Compare your forecasts to your actual results

Now it’s time to compare your real-world results to your forecasts. Start by comparing your sales forecast and expense budget to your actual results. 

Simply take the difference between your forecasted numbers and your actual results. Then do the same with your cash flow forecast. That difference you found is your variance, which can be positive or negative. 

A positive variance can mean good or bad news, depending on the context. For example, a positive variance for sales is a good thing: you sold more than you had planned. 

However, a positive variance for your expenses might not be good news because it means that you spent more than you had planned. 

A negative variance has an identical but opposite meaning to a positive variance—less sales than planned and less spending than planned.

Positive and negative variances vary from statement to statement, so you must understand the context of each financial statement as you do your financial performance review. 

This all may sound a little complicated, so it can be helpful to use a tool like LivePlan to automatically compare your budgets and forecasts to your actual results from your accounting software. Tools like this will automatically correctly color-code the good news (green) and the bad news (red).

Dig deeper:

3. Evaluate why your projections are off

Possibly the most important aspect of your review is uncovering why you performed a certain way. You’ll typically be off track, on track, or outperforming your expectations. The red flags should be fairly obvious and point you toward what needs a closer look.  

For example, let’s say you see a sharp dip in sales for a premium-tiered product category. Now you need to dig in and ask questions.

  • Did you recently introduce a new product line eating up those sales? 
  • Perhaps you increased pricing? 
  • Maybe your competitors cut prices or added new features?

You may find that decreased sales volume was offset elsewhere or that raising prices resulted in fewer sales but higher revenue. That answer won’t be as obvious as the issue. You need to be able to dig in, explore the problem or opportunity, and diagnose the root cause.

4. Make changes to your forecast and strategy

Once you know why you over or underperformed—you need to make adjustments. To start, revisit your current goals and strategy.

  • Do your short-term projects still make sense?
  • Do you need to pivot to address this problem/opportunity?
  • Will this impact the timeline of your larger strategy?

The reality is you may not need to make any changes. Maybe there are minor adjustments to be made, but overall your current priorities are still the right call. 

On the other hand, something may impact your business so drastically that you have to overhaul your entire strategy. The point is you need to connect the actions you’re taking to your financial performance and decide how you’ll respond.

From there, you need to update your forecasts. Use your current performance as your new baseline, consider your updated goals and strategy, and revise your expectations. 

Then set a timeline to do this process again. Ideally, at least once a month. Otherwise, you may make the wrong call and keep running with it—unknowingly doing further damage. 

Dig deeper:

Make use of your review

Be prepared to take action once you’ve completed your financial performance review.

Check out our guides on developing a business strategy and minimizing your business costs to put your analysis to work.

Resources for conducting a financial performance review

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Content Author: Kody Wirth

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.